DP1955 | Social Mobility and the Demand for Redistribution: the POUM Hypothesis

Publication Date

31/08/1998

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Abstract

Even relatively poor people oppose high rates of redistribution because of the anticipation that they, or their children, may move up the income ladder. This ?Prospect of Upward Mobility? (POUM) hypothesis is commonly advanced to explain why democracies do not engage in large-scale progressive redistributions. But is it compatible with rational expectations, given that not everyone can end up richer than average? This paper establishes the formal basis for the POUM hypothesis. There is a range of incomes below average where agents oppose lasting redistributions, provided tomorrow?s expected income is increasing and concave in today?s income. The laissez-faire coalition is larger the more concave the transition function and the longer the political horizon. We illustrate the general analysis with an example (calibrated to the United States) where three-quarters of families are always poorer than average, yet a two-thirds majority has expected future incomes above the mean. We also analyse mobility matrices from the Panel Study on Income Dynamics (PSID) and find significant evidence of the POUM effect.